withdrawal of stimulus is set to be gradual in the next few years
Inflation slowed sharply in August. The consumer price index for urban consumers (CPI) rose 0.3% in the month, down from 0.5% in July; August’s increase was the lowest since January. Food prices rose 0.4% on the month. Energy prices rose 2.0% on a 2.8% increase in gasoline prices.
The CPI excluding food and energy a.k.a. core CPI rose 0.1% in August; this was its lowest monthly increase since February. The CPI components that had fueled the surge in inflation in the first half of 2021 fell or slowed in August. Used car and truck prices fell 1.5% in August; car and truck rental prices fell 8.5%; and airline fares fell 9.1%. Prices of lodging away from home fell 2.9%.
New vehicle prices were an exception and continued to jump in August although their monthly increase slowed to 1.2% after rising more than 1.5% per month in each of the prior three months. Manufacturing bottlenecks from semiconductor shortages are limiting the supply of new vehicles to dealer lots, pushing up new car prices. Major household appliances rose 1.5% in price in August, too.
The CPI index for rent rose 0.2% in August, while the index for owners’ equivalent rent of residences rose 0.3%. Housing costs in the CPI have risen much slower than sale prices of new and used homes since the pandemic struck. The CPI rent index is likewise rising slower than some privately compiled alternative indices of residential rental costs.
Inflation surged in the first half of 2021 as strong consumer demand, shortages, and bottlenecks, and sudden shifts in consumer preferences drove up prices of durable goods like cars and home appliances. This surge started to unwind in August as prices of used vehicles and travel services fell.
PNC forecasts for the total CPI to increase 4.3% in 2021 and 3.1% in 2022. Inflation will cool in the remaining months of 2021 and into early 2022, then rise again over the course of 2022 as the expansion matures.
There are upside and downside risks to inflation. The biggest upside risk to the CPI in the next six months is from the potential pass-through of higher house prices to the CPI shelter component, which accounts for about a third of the total index. The biggest downside risk to the CPI is from the unwind of bottlenecks in manufacturing that have constricted supply of passenger vehicles and other durable goods. Prices of durable goods should be flat to down in the next few quarters as supply-side shocks unwind.
August’s slower CPI inflation supports the Federal Reserve’s view that much of the surge in prices in the first half of 2021 was “transitory,” that is, due to one-off shocks to supply and demand and not likely to result in much higher inflation over the longer run. Slower inflation doesn’t mean that prices have come down; instead it means that prices are rising more slowly than in the first half of the year. August’s slower inflation has limited implications for the Fed’s plans to begin tapering (reduce) its net purchases of government bonds, which they have signaled is likely to begin late this year. But slower inflation does mean that the Fed is unlikely to raise interest rates rapidly in 2022 and 2023 as the recovery matures.
U.S. stock market index futures are up around 0.4% before the market’s open on Tuesday morning on the cooler inflation report. The DXY dollar index is down 0.3% on the day, WTI crude oil is up about 0.9%, and the 10-year Treasury note yield is largely unchanged at 1.33%.
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